XAU vs. XOI

Black gold versus yellow gold. Which one is in a better position, technically?
The two major indices which reflect gold stocks versus oil stocks, the XAU
and the XOI, are hanging in the balance right now. Which one is likely to break
down (short-term) and which one is likely to break up?

The charts seem to suggest weakness in XOI and developing strength in XAU.
The XAU index has been trying to bottom above the 80 area and so far has done
a good job of it. There looks to be strong support around this level and it
should be enough to enable XAU to rally this month. It doesn't hurt XAU's chances
of a rally that the U.S. dollar index, which typically moves inverse to the
gold price, has been very weak of late, breaking below its 30-week moving average.

Another thing in XAU's favor is the fact that it has pivoted off a major historical
support between 75-80 in recent weeks. If the gold bears had complete control
over the market they should have been able to break the XAU below 75, but they
failed. This is an important sign the bears don't have control over XAU right
now. The ball is in the bull's hands, now it's up to them to run with it.

The XOI Oil Index is looking toppy and is facing resistance from its recent
highs between 620-630. This reflects the current weakness in the crude oil
market, as reflected in the recent decline beneath the $40/barrel psychological
level.

A recent headline from the Financial Times captured the psychological and
technical importance of lower oil prices, namely that it removes a major obstacle
in the way of a broad market rally. Declining oil prices can only help lift
stocks and gold stocks.

Speaking of market psychology, another major psychological factor that has
weighed heavily on the oil and gold markets this spring, but which has recently
subsided, is China. Fears of a major economic recession in China (and hence
a slowdown in commodities demand) have slackened recently. As the FT put it
in a recent article, "earlier fears about China's slowdown now appear to have
been overdone."

It would appear from a technical assessment of the markets that the XAU has
a good chance to rally in June, while XOI will have its work cut out for it
and faces selling pressure.

Clif Droke is a recognized authority on moving averages and internal
momentum. He is the editor of the Momentum Strategies Report newsletter,
published since 1997. He has also authored numerous books covering the fields
of economics and financial market analysis. His latest book is Mastering
Moving Averages. For more information visit www.clifdroke.com